calculating interest rates

7. Calculating interest rates The real risk-free rate (*) ls 2.80% and is expected to remain constant into the future. Inflation is expected to be 6.80% per year for each of the next three years and 5.60% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x (t - 19%, where t is the security's maturity. The liquidity premium (LP) on all Sacramone Products Co's bonds is 1.20%. The following table shows the current relationship between bond ratings and default risk premiums (ORP): Rating U.S. Treasury Default Risk Premium AAA ANA 0.60% 0.80% 1.05% 1.45% A 388 Sacramone Products Co. Issues nine-year, AA-rated bonds. What is the yield on one of these bands? (Hint: Disregard cross-product terms; that is, ir averaging is required, use an arithmetle average.) 10.40% 10.80% 5.60% 11.60% Sacramone Products Co. Issues nine-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.) 10.40% 10.80% 5.60% 11.60% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be higher than the yield on a 18-rated bond. Higher Inflation expectations increase the nominal interest rate demanded by investors